The Partners Value Fund declined -14.7% in the third calendar quarter, compared to a loss of-13.9% for the S&P 500. For the calendar year-to-date, the Fund declined-8.6% compared to a-8.7% decline for the S&P 500. Volatility soared as investors digested a stream of mostly negative news dominated by Europe's sovereign debt and banking woes, Washington's poor handling of the U.S. debt ceiling debate, and increasing reports that the global economic recovery was losing steam. While few stocks were spared from temporary markdowns, large-cap bellwethers on balance held up much better than their small-cap counterparts. We hold some of both in this Fund that owns businesses of all stripes.

Smaller companies, especially those in more cyclical industries, accounted for the bulk of the Fund's negative return during the quarter. Examples include SandRidge Energy (NYSE:SD) (oil and gas:-48%) and Eagle Materials (NYSE:EXP) (cement and wallboard: -40%). Both operate in out-of-favor sectors. Both have some debt. Yet, both have clearly valuable assets, and both are implementing strategic plans that should help unlock those asset values over time. Live Nation Entertainment (NYSE:LYV) (concerts and ticketing: -30%), Redwood Trust (NYSE:RWT) (jumbo mortgage investing: -25%), and Omnicare (NYSE:OCR) (long-term care pharmacy services: -20%) further highlight the breadth of the pullback in smaller company stocks. We believe all remain materially undervalued. Grand Canyon Education (NASDAQ:LOPE) (+14%) bucked the trend, rising from depressed levels after reporting solid results and providing a better than expected outlook.

We were net buyers during the late summer swoon. Valeant Pharmaceuticals is a multinational specialty pharmaceutical company with operations throughout North America, Central & Eastern Europe and Latin America. The company brings a unique, financially-driven approach to the business of manufacturing and selling drugs. Valeant has a diversified product portfolio, limited exposure to U.S. government reimbursement and minimal patent expiration risk. CEO Michael Pearson is a talented owner/operator with a track record of doing intelligent things with the company's ample excess cash flow. Iconix Brand Group owns and manages a collection of well-known consumer brands that it licenses to retailers and manufacturers. Examples include Starter, Mossimo and Peanuts. Licensing is a good business. The company's agreements provide a healthy stream of recurring revenue, much of it guaranteed. Iconix does not carry inventory, does not own stores, and does not have to invest much in working capital. As a result, the business generates very high margins and strong, predictable free cash flows.

We also added to more than a dozen positions at attractive valuations. For example, we now own larger stakes in Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), CVS Caremark (NYSE:CVS), Interval Leisure (NASDAQ:IILG), Target (NYSE:TGT) and Tyco (TYC). We trimmed Vulcan Materials to buy more Martin Marietta Materials, a higher conviction investment in the same industry. Finally, we sold Monsanto (MON) as the stock approached our value estimate after the company reported positive quarterly results.

Partners Value is a flexible, multi-cap fund that invests in companies of all sizes. Earlier in the year, our message had been that we were finding the most value in large company stocks. We now view the investing landscape as more balanced after the sharp small-cap selloff. Roughly half of the Fund's equity holdings are in large companies, with the other half split between medium-sized and smaller businesses. The Fund's residual cash position declined from 16% to 11% of net assets at quarter end.

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